Alternative Mutual Funds Stack Up to Hedge Fund Peers

The hedge fund industry continues to battle an environment that is hostile to high fees, lock-ups, and a lack of transparency. Now, if performance were sufficiently compelling, we might have to defend our peers in the broader alternatives world, because we fully agree that there are certain strategies that don’t belong in a daily liquid vehicle. And it has been suggested by more than a few hedgies that investors can’t get what they offer in mutual fund form without giving up something.

But the good news for mutual fund investors is that lower fees, daily liquidity and high transparency haven’t come with any discernable performance disadvantage. As can be seen from the table below, in multiple alternative categories the mutual fund peer groups have stood up nicely to their hedge fund counterparts.

Admittedly, there are numerous caveats that go along with such a cursory analysis. There are problems with the peer groups, biases baked into the construction of the indices, and the performance of an entire category of managers says nothing about what investors could achieve with a solid due diligence effort that may allow them to identify peer beating managers. The deviation between top and bottom quartile managers tends to be much greater in the alternative space than in the world of long-only investing to be sure.

But our point isn’t that there should be an expectation of equal or better performance in a mutual fund vehicle, simply that there hasn’t been an obvious opportunity cost to running these strategies in such a form, which should provide piece of mind to advisors and their clients, as they try to build truly diversified, robust portfolios.